Big Aussie GDP miss puts RBA forecasts in jeopardy

Eleanor Creagh

Australian Market Strategist

Summary:  Australia's Q3 GDP miss puts the country on track for a far lower rate of growth than the central bank is forecasting.


• Q3 real GDP growth comes in at 0.3% quarter-on-quarter, expectations were for 0.6% while the prior figure was 0.9%.
• Annual pace of growth slows to 2.8% versus a forecasted 3.3%, down from 3.1% and revised from 3.4%.


Ouch! A big miss for GDP in Australia where quarterly GDP growth slid back to 0.3% from 0.9% last quarter, putting the annual GDP growth rate at 2.8%. The pace of expansion is the weakest since Q3'16 when GDP contracted. This is an unnerving drop and confirms the mounting headwinds and growing chorus of expectations that GDP growth will likely be weaker than the Reserve Bank of Australia’s own 3.5% average GDP growth for the coming year.

To meet the 3.5% target for December 2018, the Australian economy would have to advance more than 1% in the coming quarter – not impossible, but unlikely. The last time the economy grew more than 1% in a quarter was back in September 2011 (1.3% q/q GDP growth).

Household spending and private investment both stumbled, weighing on growth. All eyes are on the household indicators with house prices continuing to fall and consumption accounting for around two-thirds of the economy. The effect of a sustained fall in the housing market is a key risk to forecasts and not to be underestimated. The household savings ratio fell to 2.4%, the lowest level since the financial crisis, but this drawdown is failing to support strengthened household consumption. Household spending growth slowed from 0.9% in Q2 to 0.3% against a declining household savings ratio. 
 
Enlarge
The combination of soft household consumption and negative household income growth per capita is cause for concern against the backdrop of a cooling housing market, tighter lending standards and a slowdown in global growth predicted for next year.

The recent strength in the labour market, with unemployment at the lowest level since 2012, may offset the negative wealth effect and fall in consumer spending from the sliding housing market – at least this is what the RBA is banking on. But the risks are mounting that not only will the RBA will have to lower its 3.5% annualised growth forecasts for 2019 as the economy loses momentum, but also the upbeat tone surrounding rate hikes and the likely “next move is up”.

On that basis the RBA looks set to remain on hold for the foreseeable future, and risks are starting to stack up on the downside that the next move could be a rate cut.

You can access both of our platforms from a single Saxo account.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)